The Trouble With Bill Farley: Chapter 7

In the end, it's the little things that count. With a wad of cash that Drexel Burnham Lambert Inc. drummed up for him with junk bonds in the deal-mad 1980s, conglomerateur William F. Farley racked up some big buys. He laid out $2 billion for Northwest Industries in 1985 and $3 billion for West Point-Pepperell Inc. in 1989. But one of his smallest deals, the $135.5 million sale in 1990 of metal former Doehler-Jarvis, is the one that now may lead to the dissolution of Farley's $3.5 billion industrial empire.

Claiming that Farley's sale of Doehler-Jarvis to ICM Industries Inc. last July amounted to a "fraudulent conveyance," holders of $172 million of Farley Inc. bonds on July 24 marched into federal court in Chicago and sued to force Farley Inc. into bankruptcy. Fraudulent conveyance is a mouthful, but the creditors' complaints boil down to this: Doehler was the last Farley Inc. operation capable of generating the cash to meet bond interest payments of $29.4 million a year, and its sale left Farley with $100 million of Doehler's pension and other liabilities. Moreover, the bondholders complain, Farley unfairly favored another creditor, Bank of New York, by paying it some $90 million of proceeds from an Apr. 16 sale of Fruit of the Loom Inc. stock held by Farley Inc. "We tried very hard to do this without bankruptcy," says Wilbur L. Ross Jr. of Rothschild Inc., an adviser to the Farley bondholders' committee. "If diplomacy always worked, then there wouldn't be wars, either."

Farley declined to be interviewed. But in a statement, he said that he had "offered more in liquid value than the subordinated noteholders are likely to receive in a bankruptcy." The company, he added, will seek Chapter 11 protection.

FRUIT SALE. The bankruptcy petition doesn't directly implicate Farley Inc.'s operating units. But if the involuntary filing goes through and the typical Chapter 7 timetable holds up, some six months from now Farley Inc. may have to sell its crown jewel, 7.2 million shares in Fruit, to satisfy bondholders' demands. And despite Farley's painstaking efforts to insulate his various holdings, his hold on textile company West Point-Pepperell also is in jeopardy. The reason: Farley Inc. indirectly controls West Point. "This puts the whole ownership situation in a very unstable position," says George Vanderheiden, manager of two Fidelity Investments mutual funds that own big stakes in Fruit.

The Chapter 7 bankruptcy filing comes after weeks of talks between the bondholders and Farley over a $13 million interest payment that he missed on Feb. 15. But the negotiations, which were held mostly in New York, gradually ground to a halt by mid-July. The two sides remained "tens of millions of dollars apart," Ross says, on their valuations of a proposed bond buyback by Farley. Finally, on July 22, Ross phoned Farley in Chicago and advised him that the creditors' committee was about to recommend the bankruptcy filing. "We are heading into a litigation mode," Ross says he told Farley.

Ironically, Farley bondholders don't figure to be the big winners, even if they prevail in court. Sure, they may salvage some value from their bonds. But the big payoff is more likely to go to the owners of Fruit of the Loom stock. While Farley may retain his personal holdings of nearly 3 million shares of Fruit, he'll lose most of his 43% interest in the company if he's forced to unload the 7.2 million shares owned by Farley Inc.

The upshot: Fruit shares, now trading around $16, could surge once investors stop worrying whether Farley's parlous financial situation will hurt Fruit. What's more, the underwear company, freed of a controlling shareholder, then could become a takeover target. "I'm going to win in this situation no matter what," says Fidelity's Vanderheiden. No doubt Bill Farley wishes he could say the same.

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